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A good company's culture can survive staff cuts

Saturday, February 19, 2011; 3:47 PM

The big idea: When will employee head-count reductions "destroy" a company's culture?

The scenario: Room & Board is a private home-furnishings retailer based in Minneapolis with 11 stores in U.S. metropolitan areas, including Washington. Over 30 years it has built a relationship-based business in which employees, customers and suppliers are treated as valued stakeholders. As a result, Room & Board has achieved financial success, high employee engagement, satisfaction, loyalty and productivity.

Relationships with suppliers meant that more than 90 percent of its furniture is made in the United States by family-owned artisan businesses with a two-way sharing of financial results. This honesty and transparency is evidenced in annual meetings with suppliers where the parties agree on production and prices that are fair to both sides.

With its employees, Room & Board eschews hierarchy, rules, policy manuals and executive elitism. Management shares financial information and strategy plans with all employees monthly. It has a liberal benefits package that includes part-time employees.

In 2008, as a result of the U.S. financial crisis, consumers reduced spending and Room & Board's revenue declined 20 percent in the fourth quarter. Even so, Room & Board did not let any staff go in 2008. To its surprise, in the first three months of 2009, its revenue declined further, enough to wipe out any profitability for 2009. For the first time in its history, it had employees with little to do.

Room & Board faced a tough decision: Should it undertake its first staff reduction? If it did so, would that violate or damage its culture and its relationship-based business model?

The resolution: That tough and painful decision was not made solely by Room & Board's founder and chief executive or by its senior leaders. True to its culture, Room & Board engaged its entire management team, including store and distribution center managers, in making the decision. The team recommended that staffing levels be reduced to the levels that would fit the pace of the business, therefore providing meaningful work for those who remained.

The decision process, the reasons for the reduction in employees and the severance benefit policies were discussed with all employees. Room & Board dealt directly with the pain experienced by those terminated and the grief of those remaining. At the same time, leaders in the organization did not take pay increases and the company announced that for 2009 leaders would forgo any bonuses.

Reducing the workforce was difficult and painful for Room & Board. Because for years its actions had engendered trust with its workforce, that earned trust mitigated cynicism and hypocrisy. After the reduction, every employee was quickly reengaged in new initiatives to better serve customers and to make Room & Board a better company. That engagement led Room & Board back to profitability in 2010. Room & Board shared that profitability by giving all employees raises and by making an extra contribution to each employee's 401(k) plan.

The lesson: Over the years, Room & Board had built relationships with its employees based on trust. It treated employees as partners. It engaged them in taking ownership of issues and sought their input. Having relationships based on respect and trust helps businesses get through tough times.

- Ed Hess

Ed Hess is a business professor and Batten executive-in-residence at the Darden School of Business, University of Virginia.

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Room & Board's revenue decline in the fourth quarter of 2008. Further declines in 2009 led to staff cuts.

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